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Goldcorp growth potential gets analysts' attention

Goldcorp's El Morro site in Chile

With the ramp-up of its Penasquito mine in Mexico over the next few months, along with future production from a pair of recent acquisitions, Goldcorp is turning heads in the senior gold sector for its enviable growth platform.

The Vancouver-based company's stock has been upgraded and its "outperform" ratings reinforced recently by analysts inspired by its low-cost, high-growth profile - not to mention the high price of its main metal.

Goldcorp also has its size going for it - not too big and not too small - which makes it nimble enough to make changes more easily than many of its peers.

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That also includes shedding assets, which it did earlier this week by selling its undeveloped Escobal silver deposit for $505-million (U.S.) to upstart Tahoe Resources Inc., a company run by former Goldcorp chief executive officer Kevin McArthur.

For Goldcorp, the sale monetizes an asset for which it received little credit on the stock market.

Goldcorp has been stressing for the past few months its plan to manage growth by buying assets and shedding ones when they no longer fit.

"We've done that in the past, and will continue to do that in the future," CEO Chuck Jeannes said in a recent interview.

Goldcorp transitioned to its senior gold producer status after a number of significant acquisitions over the years, including Wheaton River, Virginia Gold, Placer Dome's Canadian assets and Glamis Gold. In recent months it bought exploration firm Canplats Resources, as well as 70 per cent of the El Morro copper-gold deposit in Chile, which it scooped from fellow bidder Barrick Gold Corp.

We've learned from other senior companies that you don't want to get large just for the sake of being large … You can go out and grow, but unless you do it in a value-added way, all you are doing is getting large for the sake of size. CEO Chuck Jeannes

Goldcorp also owns a 12-per-cent stake in Osisko Mining Ltd., which has a gold deposit in Quebec. Analysts speculate the company will eventually make a bid for the entire company.

While Goldcorp is on the hunt for more deals, Mr. Jeannes insists it's not a game of catching up to the competition.

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"We've learned from other senior companies that you don't want to get large just for the sake of being large … You can go out and grow, but unless you do it in a value-added way, all you are doing is getting large for the sake of size. We don't want to do that."

He points in particular to big producers Barrick and Newmont Mining Corp., whose size is sometimes considered a problem for finding future growth as worldwide gold reserves shrink.

"They've shown there is a point in time when … it's very difficult to grow just based on the physical dimensions of the deposits we are mining," Mr. Jeannes said.

What's more, the bigger you are, the less impact your growth has on the overall company.

It's a dilemma that was in part behind Barrick's move to spin off its African assets into a separate public company, African Barrick Gold. Toronto-based Barrick said growth at its Tanzania mines were being overshadowed by their larger, lower cost operations in North and South America and the Australia-Pacific. Meantime, Denver-based Newmont is under pressure to grow through acquisitions because of its diminishing production prospects.

For now, investors appear comfortable with Goldcorp's current asset mix, giving credit to its new $1.7-billion Penasquito mine in central Mexico, which has been built on time and on budget, "no small feat in the mining industry," TD Newcrest analyst Greg Barnes recently noted.

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When it reaches full production next year, Penasquito is expected to produce about 500,000 ounces of gold annually over two decades. That will help Goldcorp reach its production target of 3.8 million ounces by 2014, up from around 2.4 million ounces last year.

Penasquito is a "key driver" of production growth for the company," according to UBS analyst Brian MacArthur, who cited Goldcorp as having the highest five-year growth profile among senior gold producers.

However, analysts caution that Goldcorp still faces many risks, including potential problems at Penasquito as it continues to ramp up production, as well as the legal battle over El Morro launched by Barrick earlier this year, alleging the Goldcorp deal was done illegally. While Goldcorp denies the claim and is moving ahead with plans to build the mine, the issue has yet to be resolved.

Also, while Goldcorp operates in less politically risky places, it is the constant target of anti-mining groups in communities where it mines in Mexico, Guatemala and Argentina. The bigger the company grows, the louder its critics are expected to become.

Another risk for the gold producer is the falling price of the commodity, however far-fetched it may sound, given its steady climb to around $1,100 from about $300 a decade ago.

Goldcorp insists it's built to stay profitable, no matter which direction gold goes.

"For Goldcorp, which is a low-cost producer, a decreasing gold price would be attractive as well," Mr. Jeannes said. "Although, we aren't saying that's what we want."

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